THE MACROSCOPE REPORT HUNGARIAN ECONOMIC OVERVIEW

Q2 2023 repercussions not just for the Swiss financial market but also for its global peers. The takeover price was far below the last traded value of Credit Suisse by market capitalization.

As a consequence of the deal, Credit Suisse’s subordinated AT1 bonds, with a volume of around CHF 16 bln, became worthless.

Since both institutions belong to the group of 30 globally systemically important banks, the events received significant international attention. In an initial reaction, U.S. Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell, for example, welcomed the solution. The chairman of the board of directors of Credit Suisse, Axel Lehmann, described the merger as the “best possible outcome.”

One of the monetary policy consequences of the banking distress is the tightening of credit conditions. The Federal Open Market Committee (FOMC) decided to raise the target range of the federal funds rate by 25 basis points to 4.75-5% at its March monetary policy meeting (March 21-22). The Federal Reserve found a compromise between ongoing inflation risks and a banking sector in turmoil by hiking the policy rate by 25 basis points. The guidance for continued rate hikes was softened significantly, such that the terminal point is in plain sight. Should financial conditions have failed to stabilize, this could have been the end of the Fed’s hiking cycle.

On the banking sector, Powell was not ringing any alarm bells, and the FOMC stated: “The US banking system is sound and resilient.” The turmoil in the banking sector is seen as being based on idiosyncratic factors related to inadequate risk management practices in individual banks, which requires investigations in regulatory processes. Nevertheless, determined action by the Fed and the U.S. Treasury was necessary to limit contagion to the banking sector as a whole.

The European Central Bank has positioned itself similarly to the U.S. Fed. Financial market conditions are as important a factor for the further interest rate path as economic data. However, the “liquidity stress” in the euro area is lower due to certain conditions, including bank regulation, deposit insurance, and monetary policy instruments. Moreover, key interest rates are far below the U.S. level. As the underlying inflationary pressures (the core rate) are incompatible with the central bank target, council members are pushing for further rate hikes. On the interest rate market, the message from ECB council members has been partially taken on board, and after the slump of interest rate expectations, at least another hike of 25 bp has been priced in again.

It is clear that the accumulation of “individual cases” from the banking sector in the last few weeks has created uncertainty, and some investors are asking whether these are a symptom of a more significant problem since, historically, an overstretch in monetary policy tightening has often meant the end of an economic upswing.

While the risks of this cannot be entirely dismissed, it is more probable that this is not currently the case. On the positive side, the authorities in both the United States and Switzerland reacted very quickly and quite comprehensively to the problems. The measures taken can be seen as sufficient to calm the market and contain the systemic risks.

That does not mean, however, that other individual cases cannot arise and cause unrest. Nevertheless, the market has gradually adopted the view that the responsible agents are prepared to intervene with support